Arlington investment bank exits prime brokerage business

Network News

Barely two years after entering the prime brokerage business, FBR Capital Markets, the Arlington-based investment bank, has cut the service line, citing a turn in market conditions.

Prime brokers provide hedge funds and other asset managers services such as securities lending, leveraged trade executions and cash management. The onslaught of the financial crisis led some of the largest prime brokers to offload their small hedge fund clients, creating an opportunity for smaller players, or "mini" primes like FBR Capital.

In no time, however, the field grew crowded and business became scarce. Some smaller primes, such as Lighthouse Financial Group, ceased operation late last year, while others are trying to create economies of scale through mergers and acquisitions, such as Cantor Fitzgerald.

"The market environment that prompted our entry into that business in the fall of 2009 changed materially, and our ability to successfully start up this business in a reasonable time frame changed with it," explained Richard J. Hendrix, president and chief executive of FBR Capital, during a recent earnings call.

The company, which referred all questions to the transcript of the earnings call, conducted a review of the prime brokerage unit at the start of the year, upon which time it discontinued the operation. Hendrix said the company is not planning to shutter any other business lines.

Other than the severance charge FBR incurred in the fourth quarter from laying off eight employees in the prime brokerage unit, the decision had minimal effect on its year-end results, according to the company.

"Prime brokerage was never a business that moved the needle in a major way for FBR," said Devin Ryan, an analyst with Sandler O'Neill. FBR's primary lines of business are investment banking and institutional brokerage. "They probably felt they could allocate resources to a lot of their other businesses that really are growing and contributing meaningfully."

The closure should free up capital for a company that has been trying for the past two years to improve its financial standing. FBR lost $37.6 million in 2010, compared to a loss of $27.7 million in the previous year.

The company has reduced its head count by 120 employees since January 2009, while subleasing nearly a third of the 98,417 square feet of space it has under contract at 1001 N. 19th St. in Arlington. All told, the company reduced its annualized fixed cost by $20 million at the end of 2010, and expects another $10 million in reductions this year.

FBR's troubles stem from severe losses in subprime mortgage investments incurred by its predecessor, investment house Friedman, Billings, Ramsey Group. The parent company eventually split itself in two, with the high-risk mortgages placed in one independent entity and other investment banking operations placed in another, FBR Capital.

The move eliminated a lot of risk, but the company is still being battered by sluggish activity in the investment banking sector. Revenue in that segment was down from $139 million in 2009 to $118 million in 2010. Yet the company's asset management business returned to profitability, with revenue up year over year from $13.2 million to $14.1 million.